Need Help With Bond Question (Calculator not accurate)

CFA General
#1

Hi guys,

I need help with a bond question, I don’t have much experience using the Texas Instruments BA II Plus Calculator.

When this is done by hand, the YTM answer is 5.03%, but when I use the calculator, it’s 5.00000%

10-year, 7% Government of Canada semi-annual bond, $1,000 face value, with four years remaining to maturity and a current price of $1,071.7014

My calculator is set at 5 decimal places.

P/Y and C/Y is set at 2 because of semi-annual.

100 = FV

3.5 = PMT

-107.17014 = PV

Then finally I press 4; 2nd; N; N; CPT; I/Y

and my answer is 5.0000

What did I do wrong here? Or is .03% off still considered the correct answer?

#2

Try N=8. :bulb:

ETA: I get 5.00000 too, based on the values you provided above. Where does it say the answer is 5.03%

#3

theres a way to calc this by hand with a simple formula. I can’t remember the formula because 4th grade was a while ago now - but I suspect it comes down to rounding error since his calculator is more precise and going into decimal places that we never even think about (but likely didn’t go that far by hand as he would still be required to type those decimal places out).

#4

It’s not a matter of decimal places; the answer (given the original information) is 5% dead.

#5

Hi guys,

Thanks for your responses.

The formula to calculate this is:

[(Interest income +/- Price Change per Compounding Period) / (Purchase Price + Par(or Face) Value)/2] x 100

So it was got down to:

Price Change per Compounding Period = -0.8962675

Average Price = 103.58507

YTM = [(3.5 - 0.8962675)/103.58507] x 2 = 0.05027235

So the final answer done by hand is 5.027235%

I can understand if the calculator was off by .01%, but this is really off.

#6

The formula above is an approximation: it uses an average interest amount over and average principal amount; your calculator is giving the exact answer recognizing the effect of compound interest every year.

#7

gotta come in hot and show me up like that huh?

#8

So the key word to take note of is “approximation”?

I’m currently taking the CSC course and plan to take CFA level 1 in December, so ideally don’t want to skip anything I don’t understand.

So here is another question from the review chapter…

Bonnie purchased a 5%, $10,000 bond at a price of 98, with two years remaining until maturity. Calculate the approximate yield to maturity on her bond.

Correct answer is 6.0606%, from 4 choices given. But again, I got something different from my calculator instead…6.09230%

Any way to change the setting on the calculator to calculate approximation instead of what it’s currently doing?

#9

^ There is nothing preprogrammed in the BA II to calculate the approximation. You have to do it the hard way. :sob: :broken_heart:

However, for CFA levels I-III, CFAI firmly believes in compound interest and your calculator will save you oodles of time when doing time value of money calculations!! :+1: